Until recently, zero-percent convertibles -- dubbed "no-nos" because they carry no bond-coupon rate and no interest rate -- were very rare. About the only previous one was by
Berkshire Hathaway
last year. They differ from more common zero-coupon bonds, because they offer no return, save for the equity-conversion feature. In contrast, while Treasury zeroes pay no cash interest, they have a yield because they're sold at a discount from their face value. The no-nos have no interest rate and are priced at par, or 100.

Juniper Networks, for example, sold $350 million of zero-interest five-year bonds at par last week. They convert into Juniper stock at just over $20 a share, a 45% premium to Juniper's recent closing price of 13.89. Each $1,000 bond can be exchanged for 50 shares of stock. This looks like a good deal for Juniper because the conversion price of $20 equates to 200 times its projected 2003 profits of 10 cents a share and 133 times estimated 2004 profits of 15 cents. By effectively offering investors an out-of-the-money call option, Juniper reaped large savings versus non-convertible "straight" debt, on which it would have had to pay a rate of 6% or more.

Magma sold $150 million of no-yield convertibles May 16. "It was a great opportunity for us," says Greg Walker, its chief financial officer. "The cost of capital was low and we were able to do the deal quickly." Magma, like the other issuers, didn't need to issue them, but found it hard to pass up virtually free money.

While the convertibles have been a boon to issuers and underwriters, investors haven't been beating down the doors to buy them. The Yahoo paper, for instance, reportedly had to be sold by its underwriter, Credit Suisse First Boston, at a discount to its offering price of 100. Since then, the bonds have risen 5%, to 105, while the company's stock has jumped nearly 25%, to 30.

Companies can issue convertible debt within hours. In contrast, an equity offering can take weeks. The easy ability to reach investors has made the convertible market hot, with 94 deals and $37 billion of new issuance this year, according to ConvertBond.com. During May, $14 billion of new converts were sold.

Zero-interest and most other new convertible issues are geared toward hedge funds, which now dominate the $300 billion market. Convertible hedge funds -- really private investment partnerships -- now control perhaps $50 billion or more of convertibles, and are the chief buyers of new issues. They usually offset, or hedge, their convertible holdings with short positions in the issuers' equity or options. Convertible funds have become popular because they've made money during the bear market. These funds focus on issuers whose stocks are highly volatile. They play the implied volatility in the equity portion of the convertible against the issuers' stock or options, giving little regard to credit ratings.

Some traditional convertible buyers, like mutual funds, don't see a lot of appeal in no-nos. "I haven't bought any, and it's not likely that I will," says David King, manager of the $800 million Putnam Convertible Income-Growth fund. "These are the kind of deals that appeal to people with advanced math degrees" but don't pass a common-sense test.

Hedge-fund buyers may hope that the issuers' stocks fall because a rising market reduces the volatility in the issuers' stock, narrows the conversion premium, and hurts the convertible's value.

The no-interest convertibles should be available to individuals later this year. But unless the bonds get much cheaper, if you like Juniper or Yahoo or other pricey tech names, it's probably better to buy their stocks.

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